ORCL for APKT Bid Surprises Telco; How Much Competition for CSCO?

By Tiernan Ray

The Street this afternoon is pondering the $2.1 billion purchase of Acme Packet (APKT) by Oracle (ORCL), announced this morning, for $29.25 per share, which will bring the database and application and server maker into the field of telecom equipment.

Shares of Acme are up $5.36, or 22%, at $29.29, pennies above the deal price, while Oracle shares are down 98 cents, or 2.7%, at $35.22. Shares of equipment makerF5 Networks (FFIV) are up 72 cents, or 0.7%, at $106.68, while Riverbed Technology (RVBD) is up 42 cents, or 2.2%, at $19.77. Although there is potential hear for greater competition to CiscoSystems (CSCO), Cisco shares are up 8 cents, or 0.4%, at $20.90 today, on positive remarks from Oppenheimer & Co. and others.

On balance, the networking equipment/telecom analysts seem more surprised by this deal than do those who follow Oracle.

Jess Lubert, Wells Fargo: Reiterates a Market Perform rating on shares of Acme, while raising his “valuation range” for the shares to $28 to $30 from a prior $20 to $25. “We were initially surprised by Oracle’s proposed acquisition of Acme Packet, as the company’s existing communication assets appear mostly focused on back office support in the areas of billing and operational support systems. That said the company also has introduced several innovative software platforms–such as the Oracle Communications Converged Application Server–that are designed to help carriers cost effectively transition from legacy and next generation IP networks. As this transition to next generation IP networks continues to unfold, SBC’s are likely to increase in importance, which likely explains Oracle’s interest in Acme.”

Dmitry Netis, William Blair: Reiterates a Market Perform rating on Acme shares. “Given Acme’s $360 million of cash and the historical trading range (that swung from $15 to $80, back to $15 and closed on Friday at $24), the price paid by Oracle seems modest to us and represents a takeout EV/sales multiple of just 4.2 times our calendar 2013 revenue estimate (5.5 times straight EV/sales) [...] We believe, however, that the usual network equipment suspects were approached (Ericsson (ERIC), [Nokia's (NOK) joint venture] Nokia Siemens, Cisco, Alcatel-Lucent (ALU), and Juniper Networks (JNPR) by the bankers [...] On the choice of a suitor, we are surprised by this acquisition, especially coming from an enterprise heavyweight like Oracle (75% of Acme’s business is in service provider vertical). The transaction instantaneously positions Oracle well in next-generation VoIP core networks, and across all three market segments—fixed-line, mobile, and enterprise. A proposed acquisition leaves more to be desired from Oracle to fill the gap in its uncorked strategy to become a next-generation all-IP networking player and by doing so delivering a major blow to its major competitor Cisco (CSCO $20.83; Outperform). The move will undoubtedly keep Cisco on its toes and may potentially prompt a bidding war, given Cisco’s focus on next-generation LTE and all-IP core. ”

Walter Pritchard, Citigroup: Reiterates a Buy rating on Oracle shares and a $38 price target. “Oracle is paying 6x LTM revenue, well within the typical range for Oracle. Although this is Oracle’s largest ever vertical acquisition (next largest was i-flex for banking vertical @ $1.5B), we do not expect any material financial impact [...] Verticals deepen Oracle’s customer relationships, drag other technology (horizontal apps) and are less competitive as competitors many times are selling point products (although IBM and SAP are strong in verticals also). Comms has been the poster child for a successful M&A strategy with significant revenue synergies. We believe the Acme acquisition is a deepening of vertical focus on communications at Oracle, not a broader sign of interest in increasing hardware revenue. Acme sells primarily to carriers – not enterprises – so there is little overlap with enterprise hardware assets.”

Raimo Lenschow, Barclays Capital: Reiterates an Overweight rating on Oracle shares, and a $40 price target. “We hosted Oracle for a road show last week (see Oracle: Positive Feedback From the Roadshow, 30th January 2013), and one message we took away was the company would like to focus more on organic growth over time while doing small bolt-on acquisitions. In our view, this acquisition is consistent with Oracle’s stated strategy given the size is relatively small for the company [...] While acquiring Acme Packet is a deeper dive than we expected, in our view this move can make sense as it brings Oracle deeply into the telecom vertical where IT spending is typically large (and helps to capture a combination of hardware and software). Oracle can not only benefit from Acme Packet’s leading presence amongst telco carriers but can leverage its own large enterprise installed base to sell into. This is a further growth opportunity as Acme Packet has been relatively less represented amongst enterprises.”

Copyright 2015 Dow Jones & Company, Inc. All Rights Reserved

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit